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The European Securities and Markets Authority (ESMA), the EU’s securities markets’ regulator, has today published a statement addressed to providers marketing, distributing or selling contracts for differences (CFDs) to retail clients.

The statement is in response to various practices and situations observed in the market, which raise concerns of non-compliance with the legal requirements applicable when providing services to retail clients.

ESMA still has serious concerns about firms’ marketing, distribution or sale of CFDs to retail clients and has considered it necessary to remind CFD providers about some of the requirements connected with the offering of CFDs. ESMA has identified undesirable practices related to:

  • Professional clients on request; and
  • Marketing, distribution or sale by third-country CFD-Providers.

Steven Maijoor, Chair, said: “ESMA has acted in response to the significant investor protection concerns raised by the offer of CFDs to retail clients and adopted its own product intervention measures in 2018. To date, many NCAs across the EU have adopted similar measures but on a permanent basis.

Ensuring investors are protected necessitates that all CFD providers respect all applicable requirements and do not circumvent them using professional client status or third country entities.”

Professional clients on request

ESMA is aware that some CFD providers are advertising to retail clients the possibility to become professional client on request. Investment firms should strictly refrain from implementing any form of practice that incentivises, induces or pressures an investor to request to be treated as a professional client.

In this respect, any form of promotional language in relation to the status of professional client shall be seen as incentivising a retail client to request a professional client status. This includes providing a comparison between leverage limits available to different types of clients and the provision of any form of rewards for becoming a professional client.

Marketing, distribution or sale by third-country CFD-Providers

ESMA is also aware that some third-country firms are marketing CFDs that do not comply with ESMA’s measures to retail clients in the European Union (EU), particularly through online advertising, and that EU firms are engaged in activities that are intended to circumvent ESMA’s temporary product intervention measures.

ESMA observes that some CFD providers established in the EU are marketing the possibility for retail clients to move their accounts to an intra-group third-country entity. ESMA notes that firms should not incentivise retail clients to start trading with an intra-group firm established in a non-EU jurisdiction.

ESMA clarifies in its statement that in the absence of authorisation or registration in the EU in accordance with MiFIR or with the national third-country regimes in force in various Member States, third-country firms are only allowed to provide services to clients in the Union at the client’s own exclusive initiative. Furthermore, information in relation to the ‘benefits’ of trading CFDs with such an intra-group third-country entity could be seen as a circumvention of ESMA’s product intervention measures by the EU authorised firm.

Next steps

Firms must ensure that they are compliant with all applicable legislative requirements and with the relevant product intervention decisions, taking into consideration clarifications provided in relevant Q&As and the content of this statement. ESMA and NCAs will continue to monitor compliance of CFD providers with the product intervention decisions.

The Armchair Trader explains:

It appears that some EU based CFD brokers are fast-tracking their clients on to professional accounts without the necessary care of duty that the ESMA regulations have been set out to protect. This note suggests that some traders are being given access to highly leveraged accounts before they are deemed experienced enough to have them.

The update also makes it clear that any EU-based client trading with a broker that is established in the European Union should hold an account with that broker within the EU. It is only on the traders’ own initiative that an account can be set up with a CFD broker that is established outside of the EU. Any trader looking for an offshore broker will have to accept the additional risks involved.

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Michael Morton

Michael has worked within the Financial Industry for more than 20 years. Starting out as a financial analyst, he has extensive experience working with fund management groups and brokerages.

With an interest in Stocks and Shares, Funds, ETFs and Commodities, his investment focus is medium to long term gains, with the objective of financial security on retirement, and building wealth for his young children for their adult life. His broker of choice is Hargreaves Lansdown.

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